Photo: The Canadian Press FILE – An advertisement for the cryptocurrency Bitcoin is seen on a street in Hong Kong, February 17, 2022. Bitcoin fell to a two-year low on Wednesday, November 9, and other digital assets sold off after the sudden collapse of crypto exchange FTX Trading , which was forced to sell to larger competitor Binance. (AP Photo/Kin Cheung, File) The rapid collapse of cryptocurrency exchange FTX sent more shocks to the cryptocurrency world on Thursday, with authorities now investigating the company for potential securities violations and analysts bracing for further falls in cryptocurrency prices. FTX had earlier this week agreed to sell itself to larger rival Binance after experiencing the cryptocurrency equivalent of a bank. Customers left the exchange after being concerned about whether FTX had sufficient capital. A person familiar with the matter said the Justice Department and the Securities and Exchange Commission are looking into FTX to determine whether any criminal activity or securities offenses have been committed. The person could not publicly discuss details of the investigations and spoke to The Associated Press on condition of anonymity. This week’s developments marked a shocking turn of events for FTX CEO and founder Sam Bankman-Fried, who was hailed as something of a savior earlier this year when he helped shore up a number of struggling cryptocurrency companies. The investigation into Bankman-Fried and FTX by those in the crypto world as well as securities regulators is focused on the possibility that the firm used customer deposits to fund bets at Bankman-Fried’s hedge fund, Alameda Research. In traditional markets, brokers are expected to segregate client funds from other company assets. Violations can be penalized by regulatory authorities. Meanwhile, investors in popular digital currencies got some relief from the latest crypto crisis on Thursday after days of selling. Bitcoin rose to $17,691 after falling to $15,512 on Wednesday. Ethereum rose 12%. The gains came after a government report showing inflation eased slightly last month boosted riskier assets. The cryptocurrency world was hoping that Binance, the world’s largest crypto exchange, could save FTX and its depositors. However, after Binance got a chance to see FTX’s books, it became clear that the smaller exchange’s problems were too big to solve. A person familiar with the transactions between FTX and Binance described the books as a “black hole” where it was impossible to distinguish between the assets and liabilities of the FTX exchange and those of Alameda Research. That person spoke on condition of anonymity because he was not authorized to speak publicly on the matter. That person said Bankman-Fried committed the “ultimate sin” by leveraging FTX assets to fund Alameda Research. In a further illustration of FTX’s financial woes, Bankman-Fried asked its investors on Wednesday for $8 billion to cover withdrawal requests, the Wall Street Journal reported, citing unnamed sources. In a series of Tweets on Thursday, FTX’s founder and CEO said he didn’t have enough cash to cover the withdrawals and was more leveraged than he thought. “I f(asterisk)(asterisk)(asterisk) showed up and I should have done better,” he said. The collapse of the cryptocurrency’s third-largest exchange is likely to cause further turmoil across the cryptocurrency world, analysts say, meaning Thursday’s rally could be temporary. “The relaxation of FTX, as well as a shake-up of its confidence in the system, will cause cryptocurrency prices to fall further, leading to ‘a new cascade of margin calls,’” JP Morgan analysts said in a note to investors. This would be similar to the selloff that occurred after the collapse of the Terra stablecoin earlier this year, where prices continued to decline weeks after it failed. “This deleveraging is likely to last for at least a few weeks unless a bailout for Alameda Research and FTX is quickly agreed,” JP Morgan analysts wrote. The crypto industry is waiting to see what other companies are affected by the FTX collapse. Venture capital fund Sequoia Capital announced Thursday that it is writing off its entire $150 million investment in FTX.
